UPDATE 2-Spain says Italian political uncertainty weighs

Mon Dec 10, 2012 6:24am EST

Related Topics

* Spain's risk premium climbs above 435 basis points

* Newspaper El Pais pushes government to ask for a bailout

* Markets see muted impact from Italy in short term

By Jesús Aguado

MADRID, Dec 10 (Reuters) - Spain will suffer contagion from Italy's new political turmoil and the government continues to study the need for outside assistance, Spanish Economy Minister Luis de Guindos said on Monday.

Spain's risk premium over Germany rose to 436 basis points after Italian Prime Minister Mario Monti announced he would resign and trigger early elections. The 10-year Spanish-German spread was up 20 basis points from Friday but still well below a high of over 650 bps hit in July.

"Every time there are doubts ... for example today in the case of Italy, when there are uncertainties about the political stability of a neighboring country such as Italy, that immediately affects us," de Guindos said in an interview with the Spanish state radio.

Over the past two years, Spain and Italy have traded barbs about the financial or political situation of one was dragging the other into the euro zone debt crisis. But leaders from the two countries also teamed up to pressure Germany to support crisis solutions such as building a banking union in Europe.

Of a potential request for European Central Bank intervention in the debt market, de Guindos said: "It is an instrument that the Spanish government is considering and we will take the decision that is best for Spain."

For the ECB to intervene, Madrid would first have to seek help from the euro zone's rescue fund.

Analysts saw limited impact in the short term for Spain from Italy's political instability.

"The risk is very limited due to the bond-buying programme (announced) by the ECB. We are not going to see interest rate spikes such as those seen before the summer, but there will obviously be some tensions leading perhaps to lower demand in the next bond auctions," said Jose Luis Martinez, economist at Citigroup.

Spain's Treasury holds a 28-year bond auction on Thursday, the first time it is has sold such a long-dated bond in at least two years.

The comments by de Guindos came after Spain's biggest selling newspaper El Pais demanded in a front-page editorial that the government urgently request a bailout to help it ride out the economic crisis.

"Postponing a request for an intervention by the European Central Bank in the market is equivalent to condemning the economy to a prolonged recession which will dramatically turn into a major increase in unemployment," the left-leaning El Pais said in the editorial published on Monday.

Hit by an economic slump that has left one in four out of work and saddled with high debts, the centre-right government faces a huge battle to rebalance its economy.

But with the country's 2012 funding needs covered, Prime Minister Mariano Rajoy has steered clear of applying for international aid which would allow the ECB to intervene in the secondary bond market to lower Spanish borrowing costs.

The ECB's announcement of its bond-buying the scheme has kept a lid on Spanish borrowing costs since September. But debt yields remain uncomfortably high for a country facing another year without economic growth.

Yields rose on Monday, with benchmark 10-year paper up 14 bps on the day at 5.63 percent as political upheaval in Italy soured investor sentiment towards the euro zone's other lower-rated sovereigns.

"Uncertainty is always badly perceived by the markets and what Monti has done in the last months has been very important and very well understood by the press. This new situation we are seeing in Italy means reversing a trend (in confidence)," said Victoria Torre, head of analysis at Self Bank.

El Pais said Madrid should act quickly to reach a decision that Spanish voters, companies and financial markets think will happen sooner or later. The paper said recent improvement in Spain's borrowing costs was a "mirage."

"If the risk premium is not reduced urgently (...) investor mistrust towards Spain will remain and the exit of the recession will be uncertain and late, perhaps after 2014," the paper said.

However, de Guindos said he saw some signs of optimism in the Spanish economy which would contract by between 1.3-1.4 percent in 2012 instead of a previously forecast 1.7 percent slump.

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